Rising prevalance of redemption rights provisions
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The prevalence of redemption rights provisions in equity financings has been trending upward.
In the first three quarters of this year, 4% of early-stage deals and 9% of late-stage deals included redemption rights provisions, compared to 3% and 8%, respectively, in 2023.
This provision has fluctuated most in late-stage deals, where its current usage is significantly above the five-year low of 7% observed in 2021.
For context, redemption rights allow investors to require the company to repurchase their shares after a set period, typically when an IPO or acquisition has not occurred. The increasing use of this protective mechanism may indicate heightened investor caution, particularly around exit opportunities.
The growing prevalence of redemption rights in late-stage deals aligns with other metrics showing that deal structures are becoming more protective at this stage. We’ve also reported a rise in atypical liquidation preferences in Series C+ rounds and an increase in pay-to-play provisions across various parts of the market.
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The five-year low in late-stage redemption rights coincided with the venture market’s peak in 2021. Interestingly, redemption rights were relatively common in both early- and late-stage deals in 2019 and 2020, years when the venture market was active. However, concerns about public listings were growing in 2019 due several high profile IPO failures, and the onset of COVID-19 in 2020.
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